Top 4 reasons to domicile a VC fund in Hong Kong
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Hong Kong is an exceptional choice when choosing the best place to domicile a venture capital fund. With its strategic location, robust legal framework, and vibrant financial ecosystem, the country offers numerous advantages for setting up and operating a successful venture capital fund.
Let’s explore the top four reasons why Hong Kong is an attractive domicile for venture capital funds. We will also look into the advantages of Hong Kong and the step-by-step process of how to set up a venture capital fund in this dynamic city.
By understanding these key factors, you’ll be equipped to make an informed decision and effectively navigate the establishment of your venture capital fund in Hong Kong.
First, why Hong Kong? Net fund inflows for the asset and wealth management business reached HKD2,152 billion in 2021, according to a survey published by The Securities and Futures Commission (SFC). Coupled with this are the country’s large talent pool, competitive start-up ecosystem, and progressive regulations creating a continued positive outlook toward Hong Kong’s fund management industry.
Here are other reasons why you should consider Hong Kong to domicile your venture capital fund:
1. Open-Ended Fund Company (OFC)
One reason to domicile your venture capital fund in the country is because of the availability of the Open-Ended Fund Company (OFC), Hong Kong’s answer to an investment vehicle. In an OFC, an open-ended fund, like a venture capital fund, takes on a corporate form domiciled in Hong Kong. Its main purpose is to “serve as an investment fund vehicle and manage investments for the benefit of its shareholders.”
An OFC in Hong Kong can be public or private. Public OFCs can be offered to the public, while private OFCs are offered privately. The key personnel needed to incorporate an OFC in Hong Kong are the following:
A minimum of two directors;
an investment manager, and;
a custodian tasked to safekeep the OFC’s assets.
Here are some of the strengths of an OFC:
It’s in a corporate structure with a separate legal personality
Shareholders can have limited liability
Private OFCs have no investment restrictions.
OFC shares may be issued or cancelled to meet shareholder subscriptions and redemption requests. Conventional companies incorporated in Hong Kong do not have this flexibility.
Provided the statutory solvency and disclosure requirements are met, distribution of assets out of share capital is allowable
In addition, Hong Kong’s OFC Grant Scheme provides a subsidy from the government to fund managers who have successfully incorporated an OFC or re-domiciled an overseas fund corporation in Hong Kong as an OFC. With the grant scheme accepting applications from 10 May 2021 until 9 May 2024, this has become an attractive aspect of setting up an OFC in Hong Kong.
2. Limited Partnership Fund (LPF)
Inspired by the known offshore limited partnership fund vehicles, Hong Kong established the Limited Partnership Fund (LPF) last August 2020. Under the LPF structure, a fund can be structured as a limited partnership form and does not have a separate legal personality.
The LPF regime was primarily proposed to attract private investment funds – including private equity and venture capital funds. A qualifying fund for registration under the LPF regime must consist of one general partner (GP) taking on an unlimited liability of the debts and liabilities of the fund, and at least one limited partner (LP) with limited liability. Here are the strengths of an LPF:
No capital gains tax
No stamp duty is imposed on any contribution or withdrawal by any LP. The same goes for any transfer of partnership interest.
The LPF is exempted from profits tax if they meet certain conditions
It is not required to publicly disclose the identity of the LP
The LPF is not subject to investment restrictions.
Are you interested in forming a venture capital fund in Hong Kong? Want to know more about the difference between setting up as an OFC or an LPF? Our fund formation experts at Lanturn would be glad to assist you on that.
3. Unified Funds Tax Exemption
The Inland Revenue Department (IRD) published the departmental interpretation of the Unified Funds Tax Exemption Ordinance last June 2020. It clarified that the ordinance aims to exempt hedge funds, including OFCs and LPFs, from Hong Kong profits tax. Regardless of the fund’s structure, the fund’s central management location and control, fund size or fund purpose provided that prescribed conditions are satisfied, the exemption may be applied to the fund.
For OFCs, profits may be exempt from tax even if those profits are not from qualified transactions provided specific conditions are met. If an LPF is able to meet the conditions of the Inland Revenue Ordinance (Cap.112), then under the Unified Funds Tax Exemption an LPF may be able to enjoy being exempted from the profits tax.
Curious if you are able to qualify for the tax exemption and tax concessions in Hong Kong? Our Hong Kong fund services representative can answer your questions on the country’s tax system and guide you in setting up a venture capital fund. Contact us today!
4. Proposed Family Office Tax Exemption Regime
Family Offices were still optimistic about investing in venture capital funds despite the pandemic. A recent study by Campden Wealth and SVB Capital proved that family offices have a significant interest in investing in both venture capital funds and start-ups, making up 47% share in their venture portfolio.
This year the Hong Kong government has initiated a formal consultation proposing a profits tax exemption for family office businesses in the country. The subjects of the proposed exemption are family-owned investment holding vehicles (FIHV) managed by single-family offices (SFO) in Hong Kong.
Under this proposal,an FIHV managed by an SFO in Hong Kong would be exempt from Hong Kong profits tax for its profits derived from certain qualifying transactions and incidental transactions (subject to the 5% threshold). This new tax exemption is expected to apply from the year of assessment 2022/23.
Despite challenging times ahead, Hong Kong is bent on solidifying its reputation as a premier international financial and wealth management centre. Just as development is constant in the fund industry, digitalisation has become a continuous growing companion to fund management.
Lanturn is here to help!
Are you interested in catching one of the opportunities in Hong Kong’s fund industry? Do you wish to set up a fund in the bustling market or are you a fund manager looking for a companion in assisting you as you raise your portfolio in Hong Kong?Let us help you get started!